Business

Financial Watchdog Chief Calls for "Bad Bank" for Toxic Assets

The head of a watchdog committee of Germany's bank stabilization fund has called for the creation of a "bad bank" that could buy up toxic assets and unblock interbank lending.

The "bad bank" could help free up interbank lending at Frankfurt's financial houses

Albert Rupprecht, parliamentarian and member of the conservative Christian Social Union, told the business daily
Handelsblatt in an interview to be published Monday that such a "bad bank" could take over banks' problem assets and free up lending among them, hit hard by the financial crisis.

But he added that his support depended on banks eventually assuming any losses that the "bad bank" might wind up with.

"Taxpayers cannot be made to shoulder the burden," he said.

Rupprecht heads the committee that oversees Germany's 480-billion euro ($670 billion) banking stabilization fund that was unveiled last October. That amount includes a financial market stabilization fund of €400 billion to guarantee loans and some €80 billion to recapitalize the banking sector through the government taking stakes in banks.

Rupprecht's voice joins those of several leading bankers who have called for the creation of just such a bank as a way to ease the credit crunch. German financial institutions are still threatened with hundreds of billions of euros (dollars) of new asset write downs.

If banks could get rid of bad assets and troubled loans, they might regain some of the confidence in one another that was shattered by the financial crisis. That loss of trust has led to a squeeze on interbank lending and tighter credit for the economy overall.

Government wary

But the German government has already rejected previous calls for creating a "bad bank," saying there was "no need."

"We don't see any urgent need to make a decision about this," said deputy government spokesman Thomas Steg in December.

The German government has "done its homework" in setting up a financial stabilization fund for banks, who are now responsible for making use of it, he said.

But lending bankers say those guarantees distort competition in favor of banks that enjoy state-backed guarantees. They say the guarantees can make conditions harder for those banks which have not needed the aid.